Krohne (Pty) Ltd v Strategic Fuel Fund Association

The appellant, Krohne (Pty) Ltd, an international manufacturer of custody metering systems, was contracted in January 2012 by the respondent, Strategic Fuel Fund Association (a s 21 non-profit company established in 1964), to supply, install and commission a metering system (the KOG metering system) at the Saldanha Terminal oil storage facility. The contract provided for payment in tranches, with a final 10% retention fee payable upon completion and certification of performance. A dispute arose regarding the accuracy of the KOG metering system - the appellant contended it had completed its task and was entitled to the 10% balance, while the respondent argued the system did not operate within the specified accuracy range of 0.3% (positive or negative) as per OIML R117-1, 2007 Edition. The parties agreed to refer the dispute to arbitration under Clause 17 of the contract. At the commencement of arbitration, they reached a settlement agreement to refer the accuracy question to SGS Gulf Limited as an independent third-party expert. The arbitrator, Advocate CHJ Badenhorst SC, endorsed this settlement agreement as an interim award. SGS issued its Final Report on 20 September 2019. On 14 October 2019, the appellant's attorneys notified the respondent that SGS had confirmed the metering system operated within specification and demanded payment of R12,745,881.89. Receiving no response, the appellant instituted motion proceedings in the Gauteng Division of the High Court claiming payment based on the SGS report.

• Whether the appellant's claim based on the enforcement of an arbitral award (interim award) is founded on a valid cause of action
• Whether the trigger event in the arbitral award (certification by the independent expert that the system operates within specification) has occurred
• Whether the interim award that incorporated a settlement agreement to refer the dispute to an independent expert complies with the provisions of the Arbitration Act 42 of 1965
• Whether the findings of the independent expert are final and binding on the parties as agreed in the interim award
• Whether an arbitrator can record a settlement agreement concluded by parties as an arbitral award

1. The appeal is upheld with costs, including the costs of the application for leave to appeal, such costs to include the costs consequent upon the employment of two counsel. 2. Orders 1 to 4 of the high court are set aside and replaced with an order: "The second point in limine raised by the respondent is dismissed with costs, such costs to include the costs consequent upon the employment of two counsel." 3. The matter is remitted to the high court to be determined on the merits.

The binding legal principles established are: (1) An interim award that incorporates a settlement agreement between parties to refer a dispute to an independent expert is a valid arbitral award under the Arbitration Act 42 of 1965, as section 1 defines 'award' to include an 'interim award'. (2) It is permissible at common law and under the Arbitration Act for an arbitrator to record a settlement agreement concluded by parties to a dispute as an arbitral award, which has the status and effect of any other award on the merits. (3) Where parties to an arbitration agree in an interim award that the findings of an independent expert shall be final and binding on them, those findings constitute a valid cause of action for enforcement purposes. (4) Arbitration proceedings are fundamentally driven by agreement and consent between parties, who define the jurisdiction, powers, procedures and processes of the arbitration. (5) A court hearing an application based on an arbitral award must focus on the actual dispute as defined by the parties' pleadings - in this case, whether the condition precedent for payment (the expert's certification) had been met - rather than being diverted to collateral issues about the validity of the arbitration process itself.

The Court made the following non-binding observations: (1) Where parties to a dispute referred to arbitration reach a settlement agreement on the main issue in dispute, this could potentially result in the arbitration proceedings becoming redundant, as there would be no further dispute to adjudicate. However, the Court noted that this question would be best answered with reference to the circumstances of each case, primarily on the merits. (2) The Court observed that in this particular instance, the high court did not deal with the merits of whether the SGS report actually concluded that the trigger event had occurred (i.e., whether the system operated within the required specifications). (3) The Court emphasized that it would not adjudicate the merits itself as it is not a court of first instance, and therefore the appropriate remedy was to remit the matter to the high court for adjudication on the merits. (4) The Court noted that if the settlement agreement approach had been properly understood and applied, the present application "would never have seen the light of day and the various grounds of opposition...would have been avoided (as would the incurring of costs)", though this was quoted from the high court judgment in the context of explaining the errors made.

This case is significant in South African arbitration law as it clarifies and reinforces important principles: (1) It confirms that an interim award that incorporates a settlement agreement between parties to an arbitration is a valid and enforceable arbitral award under the Arbitration Act 42 of 1965, as the definition of 'award' in section 1 includes an interim award. (2) It endorses and applies the principle from Bidoli v Bidoli that an arbitrator may record a settlement agreement concluded by parties as an arbitral award, giving it the status and effect of any other award on the merits. (3) It emphasizes that arbitration is a creature of agreement and consent, with parties defining the powers of adjudication and being free to modify procedures by further agreement. (4) It clarifies that where parties agree that the findings of an independent expert will be final and binding, those findings can constitute a valid cause of action for enforcement purposes. (5) The case serves as a reminder that courts should focus on the actual dispute before them as defined by the parties' pleadings, rather than being diverted by collateral issues raised in argument.